IRS Publishes Interim Report on Section 401(k) Compliance Check Questionnaire

On February 3, 2012, the Internal Revenue Service (IRS), published its Interim Report on Section 401(k) Compliance Check Questionnaire (“Interim Report”).  The Interim Report is significant because, according to the IRS, 401(k) plans have become the most prevalent form of retirement plans in the United States – with more than 500,000 401(k) plans covering approximately 60 million Americans. 

The Interim Report is based on responses to the 401(k) Compliance Check Questionnaire Project (“Project”) by 1,060 401(k) plan sponsors who were contacted at random and answered an online questionnaire.  Highlights from the Interim Report relating to employer and employee contributions include the following:

Employer Matching Contributions
  • Matching contributions on elective deferrals are provided by 68% of the plans. Of these, 88% provide matching contributions on the basis of the percentage of deferred compensation.  The other 12% of plans match contributions on the basis of the dollar amount deferred.
  • The majority of plans, 58%, have a one year service requirement for matching contributions and 77% of plans have age requirements related to matching contributions.
  • A minimum hours of service requirement is applicable to employee eligibility for a matching contribution in 28% of the plans and 22% of the plans require an employee to be employed on the last day of the plan year to be eligible for a matching contribution.
  • From 2006 to 2008, 4% of plans suspended or discontinued the employer matching contributions, with 1% of plans reducing employer matching contributions each year from 2006 to 2008.
Employee Pretax Contributions
  • A service requirement is applicable to employee eligibility to make elective deferrals in 87% of plans, with a one-year service requirement being required by 54% of plans.
  • The majority of plans, 80%, have an age requirement related to employee eligibility to make elective deferrals.
  • In 41% of the plans, participants may change their elective deferrals at any time.
  • The vast majority of plans, 96%, allow participants who are 50 or over to make catch-up contributions as permitted under Section 402(g) of the Internal Revenue Code.

In addition to the foregoing highlighted statistics, the Interim Report also provides key findings on a large number of topics, including:  (a) changes in employee deferrals and contributions; (b) top heavy plans; (c) nondiscrimination testing; (d) Safe Harbor 401(k) plans; (e) SIMPLE 401(k) plans; (f) distributions from 401(k)plans; (g) hardship withdrawals and participant loans; (h) trust assets; (i) awareness of the employee plans compliance resolution system; (j) the determination letter program; (k) customer education and outreach; and (l) plan administration.

While the IRS anticipates that a final report on the Project will be published in December 2012, 401(k) plan sponsors may find the Interim Report helpful in comparing their plan to the results of the Project and analyzing potential modifications to their 401(k) plan. According to the IRS, 401(k) plan sponsors are encouraged to “use the Questionnaire as an internal control tool to review your plan for compliance issues.”  The IRS notes that if mistakes are found, it offers a 401(k) Fix-It Guide to help correct them as well as a correcting plan errors page with additional information.

Plan sponsors may find more information about the Project and the Interim Report on the IRS’ webpage entitled 401(k) Compliance Check Questionnaire Interim ReportFinally, the IRS will hold a phone forum on the Interim Report on March 6, 2012.

Information contained in this publication is intended for informational purposes only and does not constitute legal advice or opinion, nor is it a substitute for the professional judgment of an attorney.